Consolidated Appropriations Act of 2021 Update
We provided a summary of the Consolidated Appropriations Act of 2021 in late December 2020 and we wanted to provide a summary of key individual tax provisions contained in the year end coronavirus act with this posting.
As the coronavirus (COVID-19) continues to affect local communities and global economies, Smoak, Davis & Nixon LLP remains committed to helping clients with their tax and financial planning needs. We would like to share some of the key tax provisions impacting individuals contained in the year-end coronavirus relief legislation, known as the Consolidated Appropriations Act, 2021 (H.R. 133), that was signed into law on Dec. 27, 2020.
Please contact us to discuss how we can help based on your specific circumstances.
Additional economic impact payment/recovery rebate
Like the first round of economic impact payments that taxpayers received in mid-2020, the year-end legislation provides a new economic impact payment in the amount of $600 per eligible family member ($1,200 if you file a joint return with your spouse). And, each qualifying child will also receive $600. However, the payment amount is reduced based on income. The impact payment phases out starting at $75,000 of income ($112,500 for heads of household and $150,000 for married taxpayers filing jointly) at a rate of $5 per $100 of additional income.
The IRS and Treasury have begun issuing these payments, but it will take several weeks or longer for all qualifying taxpayers to receive their payments. And, for some taxpayers, they may need to file their 2020 tax return in order to claim and receive the correct payment.
Individuals can check the status of their economic impact payments using the IRS’s Get My Payment tool.
Medical expense deduction
The new legislation should make it easier for more taxpayers to take advantage of the medical expense deduction. The threshold for taxpayers to qualify was going to be 10% of adjusted gross income beginning in 2021 but, with the recent legislation, it now permanently remains at 7.5%.
The legislation extends the $300 charitable deduction (for cash donations) for taxpayers who do not itemize (known as an above-the-line deduction). It also increases the maximum amount that may be deducted on 2021 tax returns to $600 for married couples filing jointly. Keep in mind that for 2020 tax returns, $300 is the maximum allowed per tax return, regardless of filing status.
Other tax provisions
Here are a few more tax law changes to consider for tax planning purposes:
- The law allows residents of qualified disaster areas to take a distribution of up to $100,000 from a qualified retirement plan or individual retirement account (IRA) without penalty. Generally, we do not recommend that individuals use their qualified retirement or IRA accounts other than for retirement purposes. Other options should be evaluated before considering this option.
- The mortgage insurance premium deduction is extended by one year (through 2021).
- If you’re a contractor or consultant, there are many tax-favorable elements in the new law. Some important changes include a 100% business expense deduction for meals (rather than the prior 50%) if the expense is for food or beverages provided by a restaurant. This is a temporary provision effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022. If a small business was able to take advantage of the Paycheck Protection Program (PPP), the new law clarifies that any amount received from a PPP loan that is forgiven is not considered income for tax purposes. Deductions are also allowed for otherwise deductible expenses paid with the proceeds of a forgiven PPP loan. The new law opens the program again and allows certain businesses to receive a second draw of funds.
There are a number of other tax changes contained in the year-end legislation that could apply for 2020 and beyond. We wanted to provide insight on a few of the law changes impacting individuals. We will share a separate blog posting soon with highlights of the law change impacting businesses.
Smoak, Davis & Nixon LLP is a full service CPA firm here in Jacksonville, Florida. We help our clients in all areas of their financial life – tax and financial planning, including investment advisory services and related planning through our affiliated SEC registered investment advisory firm, River Capital Advisors, L.C. Smoak, Davis & Nixon LLP provides a range of tax, accounting and attestation services to business clients as well, including tax compliance, preparation, planning, audits/reviews/compilations and QuickBooks consulting and training.
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